Securities litigation and enforcementhttps://www.securitieslitigation.blog
Fri, 08 Dec 2017 22:24:59 +0000en-UShourly1https://wordpress.org/?v=4.7.8Ontario Superior Court Grants Costs Exceeding $1 million to Successful Defendants in “Entrepreneurial” Class Actionhttp://feeds.lexblog.com/~r/SecuritiesLitigationAndEnforcement/~3/leMFUx0gU2c/
https://www.securitieslitigation.blog/2017/12/ontario-superior-court-grants-costs-exceeding-1-million-to-successful-defendants-in-entrepreneurial-class-action/#respondThu, 07 Dec 2017 23:01:54 +0000https://www.securitieslitigation.blog/?p=1061Continue reading]]>The Yip v. HSBC Holdings plc[1] saga continues with the granting of a costs award in the amount to $1,000,455.22 to the successful defendants following a successful motion by the corporate defendant to stay the action on jurisdictional grounds and an unsuccessful cross-motion by the plaintiff for a declaration that the corporate defendant was a responsible issuer (discussed in our post here). That decision is under appeal.

The decision is a cautionary tale for entrepreneurial plaintiffs bringing big dollar claims that may be perceived as overreaching.

The Allegations and Motions

Yip sued HSBC Holdings plc (HSBC) and David Bagley on behalf of purchasers of HSBC shares or American Depository Receipts. He alleged that the defendants misled purchasers to believe that HSBC was complying with anti-money laundering and anti-terrorist financing laws when it was not, and that HSBC had made misrepresentations about its nonparticipation in an illegal scheme to manipulate benchmark rates used by banks. As a result, he claimed that putative class members overpaid for their shares and suffered a collective loss of $7 billion (USD).

Causes of action under Pt. XXIII.1 of the Ontario Securities Act and for common law negligent misrepresentation were asserted. In response to the motion for certification, the defendants brought a motion to stay or dismiss the action on the grounds that the Ontario court lacked jurisdiction simpliciter over the claim or that Ontario was forum non conveniens.

Voluminous evidence was filed on the motion to stay or dismiss and cross-motion for declaratory relief. The plaintiff adduced evidence from 2 fact witnesses and 8 experts. The defendants filed evidence from 4 fact witnesses and 4 experts. A total of 12 witnesses were cross-examined in 4 different cities spanning 3 countries. Yet another witness testified by video link from Hong Kong. In total the evidentiary record comprised 18,000 pages.

Ultimately, Perell J. determined that HSBC was not a responsible issuer in Ontario and that Ontario courts did not have jurisdiction simpliciter over HSBC and Bagley. As such, Yip’s action was stayed.

Reasons for Costs Award

Justice Perell rejected the contention of Yip’s lawyers that there should be no costs award to the successful defendants or an award of less than the amount for partial indemnity costs claimed, for reasons including the following

a) No novel or important issues justifying a departure from the principle that the loser pays

Neither the issue associated with jurisdiction simpliciter nor the issue about forum non conveniens was novel. The court decided these issues based on existing Canadian jurisprudence.

b) The Litigation was Entrepreneurial

The putative class members had other remedies available to them in the jurisdictions in which they traded. They had no reasonable expectation that Ontario law might apply to foreign stock markets regulated by foreign regulators.

Mr. Yip’s lawyers knew that class action would be jurisdictionally challenged. The prime motivation for pursing this class action was entrepreneurial and Mr. Yip’s lawyers had no basis to believe that they would be relieved of the regular cost regime.

c) The Quantum of the Costs Sought by the Defendants Was Reasonable in the Circumstances

The quantum of the defence costs was found to be reasonable in the circumstances. The litigation was complex with “ardent advocacy” on both sides.

It ought to have been within the reasonable expectation of Yip that the defendants would expend $1 millon to defend themselves against a claim seeking $8 billion in damages.

Significance of Recent Decisions Relating to Costs of Certification Motions

Last year, in Green v Canadian Imperial Bank of Commerce[2], Strathy J. awarded costs to the plaintiffs on a partial indemnity basis in the amount of $2,679,277.82. In September 2017, Perell J. awarded significant costs in favour of plaintiff in Berg v. Canadian Hockey League[3], a decision which we wrote about in our previous post. In that case, Perell J. awarded the Plaintiffs $1,212,065.63 in costs, with $500,000 payable forthwith and the balance of $712,065.63 payable to the plaintiffs if they succeed at trial. Shortly thereafter, in Das v. George Weston Limited[4], Perell J. awarded the successful defendants costs of $1,350,000 and $985,601.60 respectively.

Given the foregoing, litigants are well advised to carefully consider, weigh and mitigate the risks of adverse cost in aggressively pursuing and defending certification motions in class actions – entrepreneurial or otherwise.

The author would like to thank Saam Pousht-Mashhad, Student-At-Law, for his contribution to this article.

]]>https://www.securitieslitigation.blog/2017/12/ontario-superior-court-grants-costs-exceeding-1-million-to-successful-defendants-in-entrepreneurial-class-action/feed/0https://www.securitieslitigation.blog/2017/12/ontario-superior-court-grants-costs-exceeding-1-million-to-successful-defendants-in-entrepreneurial-class-action/SEC takes action in respect of rogue Canadian ICO issuerhttp://feeds.lexblog.com/~r/SecuritiesLitigationAndEnforcement/~3/QgroJ5eCnTo/
https://www.securitieslitigation.blog/2017/12/sec-takes-action-in-respect-of-rogue-canadian-ico-issuer/#respondTue, 05 Dec 2017 21:38:41 +0000https://www.securitieslitigation.blog/?p=1058Continue reading]]>On December 1, 2017, the Securities and Exchange Commission (SEC) commenced a civil action in the U.S. District Court against PlexCorps (also known as PlexCoin and Sidepay.ca) and its principals, Dominic Lacroix and Sabrina Paradis-Royer, seeking civil remedies including injunctive relief, an order freezing all of the defendants’ assets and disgorgement. The SEC alleges that the defendants marketed and sold securities called PlexCoin in violation of anti-fraud and registration provisions of U.S. securities law. On December 4, 2017, the SEC obtained an order freezing the assets of PlexCorps, Lacroix and Paradis-Royer. This case represents the SEC’s first fraud case for its Cyber Unit.

PlexCorps is a Canadian company based in Quebec that conducted an initial coin offering (ICO) earlier this year with its issuance of PlexCoin. During PlexCoin’s presale, PlexCorps was targeted by the Autorité des marchés financiers (AMF), which issued ex parte orders on July 20, 2017 barring PlexCorps from engaging in activities for the purpose of directly or indirectly trading in any form of investment described in section 1 of Quebec’s Securities Act, including soliciting investors inside and outside Quebec. The AMF also ordered those parties to withdraw all advertisements or solicitations, online or otherwise, for PlexCoin.

On August 3, 2017, the AMF issued a press release observing that the respondents had apparently failed to comply with the AMF’s July 20, 2017 orders, and strongly cautioned investors of the major risks that could stem from responding to PlexCoin’s invitation to invest. Media outlets later reported that on August 10, 2017, the AMF conducted a raid of the Quebec City offices.

The SEC action describes the PlexCoin ICO as an illegal offering of securities, because there was no registration statement filed or in effect during its offer and sale, and no applicable exemption was in place. The complaint notes that PlexCoin investments were solicited online and worldwide, including in the U.S.

The complaint also targets representations made by PlexCorps and Lacroix in solicitation of PlexCoin investment, such as the possibility of “outlandish rewards of 1,354% in 29 days or less”, and notes that the defendants have obtained an estimated $15 million in proceeds from the illegal PlexCoin sale.

As of the date of this post, PlexCoin’s website has been replaced by a cautionary statement noting the July 20, 2017 AMF orders and stating that all investors in PlexCoins “with a credit cart (sic) associated with a billing address in the province of Quebec, in violation of the terms and conditions included in the registration process prohibiting Quebec residents from purchasing PlexCoins, will be reimbursed.” The statement further indicates that the AMF’s July 20, 2017 orders are set to be challenged. According to the AMF’s website, that challenge appears to be scheduled for December 14, 2017.

The SEC action demonstrates the cross-border regulatory risks associated with ICOs, and the SEC’s willingness to engage with persons outside the U.S. who pose a threat to the capital markets. Canadians considering launching their own ICO should take note that, in addition to the regulatory risks of ICO launches in Ontario that we previously described, they may also need to observe foreign securities laws as well.

]]>https://www.securitieslitigation.blog/2017/12/sec-takes-action-in-respect-of-rogue-canadian-ico-issuer/feed/0https://www.securitieslitigation.blog/2017/12/sec-takes-action-in-respect-of-rogue-canadian-ico-issuer/More Cyber Security Lessons from the Canadian Securities Administratorshttp://feeds.lexblog.com/~r/SecuritiesLitigationAndEnforcement/~3/cdE1H3CdyO4/
https://www.securitieslitigation.blog/2017/11/more-cyber-security-lessons-from-the-canadian-securities-administrators/#respondTue, 28 Nov 2017 17:01:06 +0000https://www.securitieslitigation.blog/?p=1056Continue reading]]>Earlier this year, we reported on continuing efforts by the Canadian Securities Administrators (the CSA) to inform the market about cyber security best practices with the publication of Multilateral Staff Notice 51-347 which concerned the disclosure of cyber security, attacks, and risks.

The CSA’s efforts continue with CSA Staff Notice 33-321 (the Staff Notice) as the CSA turns its attention to firms’ social media practices.

Eat your vegetables, floss every day, and mind your cyber security

In coordination with regulators worldwide, the CSA continues to press for firms to treat cyber security as a key part of its ordinary business practices. The CSA has identified cyber security as a priority area in its 2016-2019 Business Plan, and has taken a variety of initiatives to educate the market about the growing frequency, magnitude and complexity of cyber attacks. Suck attacks can range between receiving fraudulent invoices to co-ordinated “ransomware” attacks.

Media reports of targeted cyber attacks on large companies continued to roll in over the previous year. Victims include companies such as Yahoo, BNP Paribas, Sony, and Equifax. Even the U.S. Securities Exchange Commission has announced that they may have been a victim of such an attack.

The CSA’s Staff Notice flagged some of the important findings of its November 2016 survey of Canadian issuers, including findings that:

approximately 51% of surveyed firms experienced a cyber security incident in the year surveyed;

phishing was the most common reported incident, experienced by 43% of surveyed firms;

malware incidents and impersonation attempts were reported by 18% and 15% of surveyed firms, respectively;

only 57% of surveyed firms had specific policies and procedures in place regarding continued operation during a cyber security incident and only 56% have policies and procedures for the training of employees about cyber security;

14% of surveyed firms do not conduct an annual cyber security risk assessment;

92% of surveyed firms have engaged third-party vendors or consultants, with the majority of surveyed firms conducting due diligence on the security practices of these third parties; and

59% of surveyed firms do not have specific cyber security insurance.

The Staff Notice then set out some guidance in respect to how firms should respond to cyber security risks, including that firms should:

have specific policies and procedures addressing the use of electronic communication, the use of firm-issued electronic devices, the detection of unauthorized activity, and the reporting to appropriate personnel;

educate employees, who are often the first line of defence against an attack, on the risks associated with data they may collect, as well as the changing nature of cyber threats;

conduct risk assessments at least annually on the inventory of the firm’s critical assets and confidential data, areas of the firm’s operations that are vulnerable to cyber threats, and the adequacy of the firm’s preventative controls and incident response plan;

develop a written incident response plan outlining who is responsible for disclosing cyber security incidents, the type of incidents that may occur, procedures to stop an occurring incident, procedures for the recovery of data, and investigation of the incident to determine the extent of damage and future preventative measures;

periodically evaluate the adequacy of safeguards against cyber security incidents and the handling of these incidents by any third parties that has access to the firms’ systems and data, include cyber security provisions in written agreements with such third parties, understand the security practices of any cloud services used, and have procedures in place in the event that data stored on cloud services is not accessible;

encrypt and password protect all electronic devices, ensure secure access to portals used for accessing the firm’s systems and data, and regularly back-up and test back-up processes; and

The Staff Notice also warns that social media may be used as a vehicle to carry out cyber attacks, particularly phishing or malware attacks. The CSA’s Staff Notice pointed to statistics gathered for the purpose of publishing a previous staff notice, CSA Staff Notice 31-325, which concerned record-keeping activities related to social media used by firms for marketing. In the cyber security context, the CSA noted that:

firms should implement policies and procedures on the appropriate use of social media and for the review, approval, and record keeping of social media content; and

firms should have approval and monitoring means for social media communications and, if firms do not permit the use of social media, means of monitoring for unauthorized use.

Conclusion

The CSA continues to add to a library of publications on what firms should be doing in response to cyber security threats. It will not be long before Canadian securities regulators take a more active enforcement role against firms that fall behind the standard. We have already seen multiple class actions launched against firms that are the victim of a cyber attack, including Target, Home Depot, Avid Dating and Avid Life (Ashley Madison), and Equifax. We expect that Canadian regulators will be seeking opportunities for enforcement actions as we look forward to 2018.

The author would like to thank Alexandre Kokach, Student-At-Law, for his contribution to this article.

]]>https://www.securitieslitigation.blog/2017/11/more-cyber-security-lessons-from-the-canadian-securities-administrators/feed/0https://www.securitieslitigation.blog/2017/11/more-cyber-security-lessons-from-the-canadian-securities-administrators/Supreme Court Denies Leave to Applicants Seeking to Challenge Bifurcation of OSC Proceedingshttp://feeds.lexblog.com/~r/SecuritiesLitigationAndEnforcement/~3/mQJHpbmMUiM/
https://www.securitieslitigation.blog/2017/11/supreme-court-denies-leave-to-applicants-seeking-to-challenge-bifurcation-of-osc-proceedings/#respondMon, 13 Nov 2017 17:01:08 +0000https://www.securitieslitigation.blog/?p=1054Continue reading]]>The Supreme Court of Canada recently denied leave to appeal the Court of Appeal for Ontario’s decision in Ontario Securities Commission v. MRS Sciences Inc. (MRI Sciences), which considered the bifurcated nature of proceedings before the Ontario Securities Commission (the OSC). The decision is significant for its judicial endorsement of the OSC’s current two-phased approach of holding an initial hearing to determine the outcome of a proceeding on its merits, and then a subsequent separate hearing to determine sanctions and costs.

Background

On February 2, 2011, an OSC panel comprised of two commissioners released a decision holding that MRI Sciences Inc., as well as a number of related individuals (including the current Applicants for leave), had sold securities without being registered as dealers and traded securities without a prospectus. Shortly after the release of this decision on the merits, the terms of the commissioners on that panel expired; accordingly, the OSC informed the parties that the upcoming sanctions hearing would be presided over by a differently constituted panel.

The Applicants brought a motion before the OSC to dispute the jurisdiction of a differently-constituted panel to preside over a sanctions hearing. The OSC dismissed the motion on December 6, 2011 (the PanelComposition Decision). Subsequent attempts to challenge the Panel Composition Decision before the Divisional Court were dismissed as premature.

The sanctions hearing eventually proceeded in late 2013, and the Applicants were penalized with 10-year trading bans, 10-year director and officer bans, reprimands, administrative penalties and costs.

Judicial History

Following the sanctions hearing, the Applicants commenced an appeal before the Divisional Court to once again challenge the Panel Composition Decision (among other things). At the core of the Applicants’ argument was a provision Statutory Powers Procedures Act (the SPPA) that provides as follows:

If the term of office of a member of a tribunal who has participated in a hearing expires before a decision is given, the term shall be deemed to continue, but only for the purpose of participating in the decision and for no other purpose.[1]

Essentially, the Applicants argued that a merits hearing and a sanctions hearing are functionally two stages of a single quasi-judicial hearing. Therefore, the Applicants argued, the terms of commissioners presiding over the merits hearing should have been extended until the conclusion of the sanctions hearing. In response, the OSC argued that while the merits hearing and the sanctions hearing may be part of the same proceeding, they do not represent a single hearing, and the SPPA provision is therefore inapplicable; indeed, the OSC’s Rules of Procedure clearly contemplate that a proceeding and a hearing are not the same.

In a split decision, the Divisional Court dismissed the appeal. While the majority accepted that the Applicants’ interpretation of the SPPA was reasonable, it held that the OSC’s interpretation was also reasonable, which was sufficient to dismiss the appeal under the applicable standard of review. On further appeal, the Court of Appeal for Ontario agreed enthusiastically with the majority decision of the Division Court, emphasizing that there was no procedural unfairness or breach of natural justice associated with the OSC’s decision to consitute a different sanctions panel.

Significance

In refusing leave, the Supreme Court of Canada endorsed the Court of Appeal’s assessment that the current practice of bifurcating proceedings is neither contrary to the SPPA nor is it in conflict with requirements of procedural fairness, even in circumstances where a sanctions panel is differently constituted than the merits panel.

On October 24, 2017, Justice Perell of the Ontario Superior Court of Justice dismissed a motion to certify claims for negligent misrepresentation and negligence against two underwriters primarily on the basis that a class action was not the preferred procedure.[1] The Court also held that the plaintiff’s common law negligence simpliciter claim did not disclose a cause of action. The foreseeability and proximity stages of the Anns v Merton[2] test arguably were not satisfied, and policy factors negated the existence of any duty of care.

Background

Hycroft, formerly Allied Nevada Gold Corp., was a mining company dual-listed on the New York and Toronto stock exchanges. In 2013, Cormark Securities and Dundee Securities (the Underwriters) agreed to a bought deal of Hycroft’s secondary public offering. Under s. 59(1) of the Ontario Securities Act (the Act), an underwriter is required to certify that the prospectus contains full, true and plain disclosure to the best of their knowledge, information and belief.[3]

Hycroft incorporated by reference its most recent Annual Report, Interim Report and MD&As as part of the prospectus. These documents included representations about Hycroft’s gold production and its ability to finance its gold mine. Following the completion of the bought deal, Hycroft shares were resold to purchasers, including LBP Holdings, which asserted that it purchased the shares in reliance upon these representations and the Underwriters’ certification of the prospectus. Following the offering, Hycroft released information about operational problems, which led to a two-day decline of approximately 37% in share value.

LBP Holdings alleged that Hycroft violated disclosure obligations because it failed to include these operational problems that had begun several months before the public offering in its prospectus. LBP Holdings also alleged that the Underwriters breached duties of care owed to class members to conduct reasonable due diligence and ensure that the prospectus was free of any misrepresentation.

Certification Motion

LBP Holdings moved to certify a proposed class action for misrepresentation under s. 130 of the Act and equivalent Securities Acts in other provinces against Hycroft and two of its executives (the Hycroft Defendants), and for negligence and negligent misrepresentation under the common law against the Underwriters.

The certification motion against the Hycroft Defendants was allowed, but the motion against the Underwriters was dismissed on the basis that LBP Holdings 1) had not met the cause of action criterion with respect to its negligence claim, and 2) in any event, had not satisfied the preferable procedure criterion.

No Cause of Action for Negligence: A “Disguised Version” of the Misrepresentation Claim

The Court held that it was plain and obvious that the pleading of negligence had been “dressed up” to hide its real identify as a negligent misrepresentation claim to avoid the necessity of proving reliance. It arose from the same circumstances as the negligent misrepresentation claim, and the alleged duties to properly price the shares and to perform due diligence to ensure comprehensive disclosure of material facts in the prospectus were “inexorably intertwined” with the negligent misrepresentation claim. Accordingly, the negligence claim was subsumed by the negligent misrepresentation claim. Nevertheless, the Court still went on to analyze LBP Holding’s negligence claim as a free-standing claim as part of its reasons for decision.

The negligence claim as pleaded did not fall under any of the five previously recognized categories of claims for which a duty of care had been found with respect to pure economic losses. Thus, the Court applied the following Anns[4] analysis to determine whether a new category was warranted and reached the following conclusions:

Was the harm that occurred a reasonably foreseeable consequence of the Underwriters’ acts?

No. In the circumstances of a bought deal, an underwriter would not anticipate that purchasers would be relying on it to act as a gatekeeper to prevent the harm of buying Hycroft’s shares at an inflated price “beyond and distinct” from its duties of care under s. 130 of the Act and its common law duties with respect to misrepresentations in the prospectus.[5]

Was there sufficient proximity between the Underwriters and prospective investors?

No. Underwriters are not hired to provide an opinion or to develop an investment transaction or scheme. They are hired “essentially to be distributers of another’s goods often as sales agents, or as in the immediate case, by assuming the risks of a bought deal.”[6] Unlike issuers and auditors, underwriters make a “weak representation” that the prospectus contains full, true and plain disclosure to the best of their knowledge, information and belief. They do not make strong representations of the nature made by “the promoters, auditors, lawyers and experts involved in the creation of the investment.”[7] As such, there was insufficient proximity.

Are there any overriding policy considerations to negate any prima facie duty of care?

Yes. Extending an underwriter’s liability for pure economic loss beyond its current liability under statutory and common law misrepresentation claims would:

(a) deter useful economic activity where the parties are best left to allocate risks through the autonomy of contract, insurance, and due diligence;

(b) encourage a multiplicity of inappropriate lawsuits;

(c) arguably disturb the balance between statutory and common law actions envisioned by the legislator; and

(d) introduce the courts to a significant regulatory function when existing causes of action and the marketplace already provide remedies.[8]

For these reasons, at least within the bought deal context, the Underwriters did not owe LBP Holdings a duty of care in negligence simpliciter.

Too Many Individual Issues

The Court further held that, in any event, the constituent elements of the torts involved – particularly reliance, causation and damages – were matters that raised highly individual issues. Applying Musician’s Pension Fund of Canada v Kinross Gold Corp[9], the inevitably of trying these individual issues substantially diminished the productivity, manageability and benefits of a class proceeding. Further, pursuing the potential individual actions (with an average claim of USD $300,000) against the Underwriters with other putative class members joined as co-plaintiffs was an economically viable alternative.

As a result, the Court held that none of the factors of the preferability analysis enumerated by the Supreme Court of Canada in AIC Limited v Fisher[10]– i.e. judicial economy, behaviour modification and access to justice – was present to justify a class proceeding.

The author would like to thank Peter Choi, Student-At-Law, for his contribution to this article.

]]>https://www.securitieslitigation.blog/2017/11/no-common-law-duty-of-care-owed-by-underwriters-to-investors-in-a-bought-deal-lbp-holdings-ltd-v-hycroft-mining-corporation-2017-onsc-6342/feed/0https://www.securitieslitigation.blog/2017/11/no-common-law-duty-of-care-owed-by-underwriters-to-investors-in-a-bought-deal-lbp-holdings-ltd-v-hycroft-mining-corporation-2017-onsc-6342/CSA Clarifies Disclosure Requirements for Issuers with U.S.-Based Marijuana Activitieshttp://feeds.lexblog.com/~r/SecuritiesLitigationAndEnforcement/~3/OH8CuXFEF7s/
https://www.securitieslitigation.blog/2017/10/csa-clarifies-disclosure-requirements-for-issuers-with-u-s-based-marijuana-activities/#respondMon, 30 Oct 2017 19:01:10 +0000https://www.securitieslitigation.blog/?p=1047Continue reading]]>The regulatory environment for U.S.-based marijuana-related operations remains uncertain. At present, marijuana-related activities that are legal under U.S. state law remain illegal under U.S. federal law. Issuers in Canada connected to U.S. marijuana operations remain unsure of their disclosure obligations to Canadian investors and have sought clarification on what constitutes appropriate and timely disclosure. Recently, in the face of this uncertainty, the Canadian Securities Administrators (“CSA”), an umbrella organization of provincial and territorial securities regulators, has provided some much needed guidance.

On October 16, 2017, the CSA published Staff Notice 51-352[1], which outlines disclosure expectations for issuers that presently have — or are engaged in developing — marijuana-related activities within U.S. states that have authorized such activity (“U.S. Marijuana Issuers”). In addition to outlining its general disclosure expectations, the CSA provided specific disclosure requirements that apply depending on how U.S. Marijuana Issuers conduct operations or are otherwise involved in the U.S. marijuana industry.

All U.S. Marijuana Issuers

For the CSA, U.S. Marijuana Issuers must describe the nature of their involvement in the U.S. marijuana industry and explain that marijuana remains illegal under U.S. federal law. In addition, all U.S. Marijuana Issuers must state that the federal government’s forbearance of enforcement is subject to change, and must disclose the resultant risks, including the risk of adverse enforcement action. Further, U.S. Marijuana Issuers must state whether and how its marijuana activities are consistent with any U.S. federal enforcement priorities. The CSA also expects all issuers to identify financing options available to them in support of continuing operations, and detail their ability to access public and private capital.

U.S. Marijuana Issuers must also include at least one of three types of disclosures, each of which relates to an issuer’s industry involvement – direct, indirect, or ancillary.

Issuers with Direct Involvement

Direct industry involvement arises when an issuer (or a subsidiary that it controls) is involved in cultivating or distributing marijuana under a U.S. state license.[2]

Issuers with direct involvement must both detail and confirm how they comply with licensing and regulatory requirements enacted by the applicable U.S. state. These issuers must provide specifics of their program and procedures for monitoring compliance with U.S. state law on an ongoing basis, and disclose facts surrounding any material non-compliance, material citations, or notices of violation.

Issuers with Indirect as well as Ancillary Involvement

Indirect industry involvement refers to instances where an issuer has a non-controlling investment in an entity that otherwise has direct involvement in the U.S. marijuana industry.[3]

U.S. Marijuana Issuers with indirect industry involvement must detail the regulations that apply in the U.S. states in which their investee(s) operate, and provide reasonable assurance that the investee’s business complies with applicable licensing and regulatory requirements within the relevant U.S. states. U.S. Marijuana Issuers with ancillary industry involvement are also required to provide a form of assurance similar to the latter.

In short, CSA Staff Notice 51-352 provides much-needed guidance on disclosure obligations. Through its Staff Notice, CSA Staff has provided U.S. Marijuana Issuers with disclosure benchmarks directed at assisting investors make sound investment decisions in light of the shifting U.S. regulatory environment. CSA Staff expect U.S. Marijuana Issuers to always remain sensitive of their obligation to evaluate, monitor, and reassess risks on an ongoing basis in order to supplement, amend prior disclosures, and communicate material changes to investors.

The author would like to thank Blanchart Arun, Student-At-Law, for his contribution to this article.

… provides clarity and transparency regarding the circumstances under which ASC staff will consider exercising their discretion to grant credit to those individuals or entities that provide exemplary cooperation to ASC staff in the course of enforcement matters. This exemplary cooperation is cooperation above and beyond mere compliance with obligations under Alberta securities laws.[1]

Policy 15-601 follows the issuance of the ASC Three-year Strategic Plan F2018-2020[2], which had followed a consultation and review process conducted in 2016.

Prior to the release of Policy 15-601, it had been the stated practice of the ASC to allow credit to those who “fully cooperate with ASC staff in enforcement matters in a timely manner.” According to the ASC, Policy 15-601 now “explains the use of discretion by ASC staff when considering the appropriate enforcement action and assessing the appropriate sanction for misconduct.”

Application and Purpose of Policy 15-601

Policy 15-601 does not apply to any matter that results in quasi-criminal or criminal proceedings. Section 10 of the Policy sets out certain factors that may give rise to quasi-criminal or criminal investigation (for example, conduct that involved fraud).

The Policy states that its purpose is to explain “the benefits of cooperating with ASC staff and the factors ASC staff consider when determining whether that cooperation earns Credit in enforcement matters.” “Credit” is defined as something that “may include” any of the actions enumerated in section 12. Section 12 sets out examples of credit for “Exemplary Cooperation”, which in turn is defined as including the actions in section 6.

“Exemplary Cooperation”

Section 6 sets out “What the ASC Expects” in terms of earning Credit for Exemplary Cooperation.[3] This includes “Self-reporting”[4]; full disclosure; full cooperation; making employees, officers and directors available for interviews[5]; and the taking of “Corrective Action”.[6]

Credit for Exemplary Cooperation

Section 12 of Policy 15-601 provides that if there has been Exemplary Cooperation, ASC staff may, among other things, narrow the scope of staff’s allegations; proceed on the basis of a joint recommendation for sanction, or limit the costs that they would ordinarily seek.[7]

Section 20 provides that the ASC may disclose or publicize examples of Credit that have been granted for Exemplary Cooperation.

No Enforcement Action Agreements

Policy 15-601 provides that in very limited circumstances ASC staff may agree to take no enforcement proceedings. Staff’s considerations will include whether there has been Exemplary Cooperation, the nature of the impugned conduct and resulting harm, and whether the conduct has been stopped and harm rectified.

Settlement Agreements and Agreed Statements of Fact

While Policy 15-601 contemplates that ASC staff have the discretion to enter into agreed statements of fact or make joint submissions on sanction, it emphasizes that an ASC Hearing Panel is not obliged to accept either.

No ASC Policy on No-Contest Agreements or Whistleblowing – Yet

At the time of this publication, the ASC is developing, but has not finalized, policies on no-contest settlement agreements and whistleblowing.

While it remains to be seen, we expect that the ASC will determine to allow no-contest or no- admission settlement agreements in limited circumstances – something far short of what we have seen allowed by the SEC and perhaps short of that allowed by the OSC.[8] No-contest/no-admission settlements can be very significant to market participants who seek to narrow their exposure to follow-on litigation such as class actions.

The ASC has stated that it is considering the development of a whistleblower program to motivate people within organizations to provide tips regarding serious violations of Alberta securities law. We expect that the ASC will issue a whistleblower policy which provides for confidentiality and protection of retribution, but does not provide for financial rewards.[9]

[3] Section 11 sets out instances where no Credit will be given. In general terms, section 11 contemplates conduct that is to the opposite effect of the conduct contemplated by section 6.

[4] “Self-report” means “voluntarily reporting yourself for your own possible securities misconduct or breach of Alberta securities laws, including reporting any of your conduct that may be harmful to the Alberta capital market or contrary to the public interest.” Sections 15 through 17 provide for certain conduct that must take place in order to Self-report as contemplated by the Policy. One requirement is that the self-reporter must attend an interview with ASC staff to provide further information and respond to questions.

[5] Section 7 provides that if requested, the ASC may issue a summons or production order before anyone is required to speak to the ASC or provide documents. (These are often requested to afford the witness available protection under applicable evidence statutes.) Section 7 provides that such a request will not been seen as a failure to cooperate so long as the witness is cooperative in scheduling and attending the interviews or providing the records within a reasonable time. Section 7 concludes: “Everyone is expected to be forthright and forthcoming when speaking to ASC staff.”

[6] “Corrective Action” means Voluntary and timely conduct aimed at reducing harm done to participants in the Alberta capital market and preventing future breaches of Alberta securities laws. “Voluntary” means something not required by law. This is reinforced in section 8, which states: “Compliance with Alberta securities laws alone is not Exemplary Cooperation and will not earn any Credit.”

[7] Section 13 provides for the receipt of partial Credit for Exemplary Cooperation that was not initially given but was later given.

[8] The Ontario Securities Commission has allowed such settlements since 2014, and at the time of publication it is our information that there have been 9 such settlements.

]]>https://www.securitieslitigation.blog/2017/10/alberta-securities-commission-policy-15-601-credit-for-exemplary-cooperation-in-enforcement-matters/feed/0https://www.securitieslitigation.blog/2017/10/alberta-securities-commission-policy-15-601-credit-for-exemplary-cooperation-in-enforcement-matters/SEC action against hedge fund raises difficult questions for investment advisershttp://feeds.lexblog.com/~r/SecuritiesLitigationAndEnforcement/~3/OJDGFpxUdX0/
https://www.securitieslitigation.blog/2017/10/sec-action-against-hedge-fund-raises-difficult-questions-for-investment-advisers/#respondTue, 17 Oct 2017 13:01:07 +0000http://www.securitieslitigation.blog/?p=1040Continue reading]]>The SEC recently extracted a settlement from a hedge fund that raises difficult compliance-related questions for investment advisers. On August 21, 2017, Deerfield Management Company L.P. (“Deerfield”), a hedge fund and registered investment adviser, paid approximately $4.6 million to settle SEC charges that Deerfield failed to create and enforce policies and procedures reasonably designed to prevent the misuse of material, nonpublic information in violation of Section 204A of the Investment Advisers Act of 1940. The allegations centered on confidential information that Deerfield analysts had obtained from a political intelligence firm. The SEC had previously charged certain of those analysts with insider trading which is likely why the SEC took an aggressive posture with the firm.

The SEC ignored the concept of risk-based compliance controls

Although Deerfield had extensive compliance controls concerning interactions with experts from “expert networks,” the controls were less robust for dealings with more general types of research firms, such as political intelligence firms. Expert networks are companies that have affiliations with experts in various types of industries, some of whom may work at public companies. Expert networks make their experts available for consultation in return for a fee. When engaging with experts from expert networks, Deerfield’s compliance controls included conducting due diligence to evaluate the expert network’s compliance controls, providing oral admonitions to the expert not to disclose inside information, and summarizing the interaction in an internal database. In contrast, when engaging with research firms, Deerfield only required its analysts to demonstrate that the research firms “observe policies and procedures to prevent the disclosure of material non-public information.” Deerfield’s compliance manual did not specify how this was to be done. Moreover, Deerfield employees were expected to identify potential issues of concern and report them to supervisors.

A few years ago the SEC scrutinized several hedge funds for using expert networks as a way to attempt to gain material, nonpublic information about the employers of certain of the experts.1 Therefore, it is not surprising that Deerfield, like many hedge funds, implemented enhanced controls around the use of expert networks. Indeed, the SEC surely would have criticized Deerfield had the firm not done so.

One of the bases for alleging that Deerfield’s controls were deficient with respect to consultations with research firms, including political intelligence firms, was that the controls were not as rigorous as the controls for consulting with expert network firms. Pointing to the heightened controls in place for utilizing the services of expert networks as a way of demeaning the controls in place for research firms seems like a false, misleading and troubling comparison. Unlike expert networks, research firms do not retain the services of other individuals employed by public companies, who often have access to their employer’s material, nonpublic information. As the risks of utilizing research firms and expert networks are fundamentally different, one would naturally expect that the control structures would also be different.

The charges are not consistent with the factual allegations

The SEC contended that Deerfield did not enforce its policies and procedures with respect to the engagement of a political intelligence firm (the “Research Firm”) because Deerfield supposedly ignored several purported red flags that suggested the Research Firm might be improperly sharing material, nonpublic information with Deerfield analysts. One such red flag was the fact that the Research Firm’s Chief Compliance Officer was also its political intelligence analyst. Despite the conflict of interest created by a Chief Compliance Officer overseeing their own work, Deerfield continued to work with the Research Firm.

The SEC also alleged that several communications with the Research Firm, which were forwarded to Deerfield management, including the Chief Compliance Officer and General Counsel, were red flags because they contained potential insider information. A careful reading of the selected examples, however, raises questions as to whether the emails actually were suggestive of the Research Firm providing material, nonpublic information in breach of confidentiality obligations. For example:

In July 2010, the Research Firm emailed several Deerfield analysts about a forthcoming Centers for Medicare and Medicaid Services (“CMS”) regulation, saying, “ . . . I just heard from a reliable CMS source the reg is likely coming out today after 4pm.” Noticeably absent from the SEC’s allegations was any suggestion that the Research Firm had obtained and/or communicated the substance of the not-yet-released regulation.

In September 2010, a Deerfield analyst circulated a summary of a conversation he had with the Research Firm. The analyst noted that the Research Firm had a contact on the inside of a closed-door meeting, and that certain government regulations would be announced in 2011 to be implemented in 2012. The SEC did not explain how the Research Firm stating that regulations would be announced within the following year with an effective date another year after that constituted material, nonpublic information.

In September 2011, a Deerfield analyst emailed the Research Firm regarding an anticipated coverage decision by Medicare, asking, “Is it already public or did you just hear about it from CMS guys?” The SEC did not allege that this information was non-public.

Far from being indicative of the Research Firm providing sensitive information in breach of confidences, the emails seem more consistent with a political intelligence firm providing insight derived from general market intelligence that it had been able to gather. It is hardly surprising that these three isolated emails did not trigger alarm bells within Deerfield’s management. This demonstrates the real risk of the SEC being willing to twist emails and other documents out of context to try to force a settlement as regulated entities, such as hedge funds, are often reluctant to litigate against their regulators.

The SEC further alleged that other communications between Deerfield and the Research Firm contained material, nonpublic information that resulted in trading activity by Deerfield. For example:

In May and June 2012, the Research Firm provided Deerfield analysts with specific information about confidential CMS plans to cut Medicare reimbursement rates for certain radiation oncology treatments. Deerfield then shorted the stock of two companies that offered products and services related to radiation oncology, resulting in a profit after CMS publically announced the rate cut.

In May and June 2013, the Research Firm provided Deerfield analysts with specific information regarding a proposed 12% reduction in Medicare reimbursement rates for certain kidney dialysis treatments, services and drugs. Deerfield then shorted the stock of a company that offered products and services related to kidney dialysis, resulting in a profit after CMS publically announced the 12% cuts.

In November 2013, the Research Firm then provided Deerfield with specific information regarding confidential CMS plans to implement the above-mentioned 12% cut over a four-year period, instead of at one time. Deerfield bought shares in a company that provided products and services related to kidney dialysis. The decision to phase-in the cuts over a 4-year period was received positively by the market, so Deerfield profited after CMS publically announced the plan.

As a result of this alleged insider trading, Deerfield realized almost $4 million in profits from May 2012 to November 2013. Deerfield agreed to a civil money penalty of $3,946,267, disgorgement of $714,110, and prejudgment interest of $97,585.

While the above emails may be suggestive that the Deerfield analysts engaged in insider trading, they do not support the allegation that Deerfield did not enforce its policies and procedures because there is no indication that Compliance personnel or others in management knew or should have known of the emails. The SEC alleged that Deerfield’s controls were flawed because Deerfield required its employees to self-report incidents of third parties improperly sharing information with them. That reasoning is seriously flawed. The SEC would surely be quick to fault any adviser’s policies that did not require employees to report instances of potential wrongdoing.

Moreover, the SEC’s allegation on this point is undercut by the comparison to Deerfield’s policies with respect to expert networks, which required analysts to describe their interactions with expert networks in a database. The SEC specifically praised Deerfield’s expert network’s policy for this feature. Aside from such data input necessarily being subjective and dependent on the employee’s discretion and accurate self-reporting, it is implausible to believe that an analyst who was going to engage in illegal insider trading would then consciously create a company record essentially confessing to the fact that he/she was receiving material, nonpublic information from a third party.

The practical reality of this enforcement action appears to be that the SEC was looking to for a way to hold Deerfield accountable for what the SEC believed to be illegal tipping and trading by the Research Firm and Deerfield analysts, respectively. In order to back into a theory of liability against the firm, the SEC apparently took a creative and aggressive view of evidence to justify bringing an enforcement action.

Practical implications for investment advisers

The manner in which the SEC justified bringing this enforcement action raises some difficult and troubling questions for investment advisers. Specifically, if an adviser is supposed to tailor its compliance policies and procedures to address known risks and areas of regulatory concern – as Deerfield did with expert networks – how does the adviser prevent the SEC from arguing that the adviser’s compliance controls were unreasonably designed because violations occurred in other parts of the business that did not present the same types of elevated risks? 2

While the SEC took a dim view of Deerfield’s alleged reliance on self-reporting by analysts, self-reporting is a necessary component of most compliance programs. To protect against scrutiny and second-guessing, advisers should provide regular training on their policies, including helpful tips and suggestions on what to look for and what to do. Including such practical guidance in the compliance manual is another technique that can create favorable impressions with the SEC. Finally, advisers would be well-served to implement practices that demonstrate they are actively looking for indicia of potential policy violations, such as targeted electronic communication reviews that may be focused not only on key words, but tied to timely trades.

]]>https://www.securitieslitigation.blog/2017/10/sec-action-against-hedge-fund-raises-difficult-questions-for-investment-advisers/feed/0https://www.securitieslitigation.blog/2017/10/sec-action-against-hedge-fund-raises-difficult-questions-for-investment-advisers/Stay of Securities Prosecution For Delay: Application of the Jordan framework to Regulatory Offences Punishable by Imprisonmenthttp://feeds.lexblog.com/~r/SecuritiesLitigationAndEnforcement/~3/Hums6cIUZQg/
https://www.securitieslitigation.blog/2017/10/stay-of-securities-prosecution-for-delay-application-of-the-jordan-framework-to-regulatory-offences-punishable-by-imprisonment/#respondThu, 12 Oct 2017 19:02:39 +0000http://www.securitieslitigation.blog/?p=1037Continue reading]]>In one of the first decisions in Canada applying the Supreme Court of Canada’s new Jordan framework for the measurement of unconstitutional Crown delay to prosecutions for breach of securities law, the Superior Court of Quebec has upheld a stay issued by the provincial Court of Quebec in Autorité des marchés financiers c. Desmarais. The stay had been issued on grounds that the case was not sufficiently complex to require an extension of time for the Crown before trial and that the presumptive 18-month ceiling on Crown delays should be enforced.

In Desmarais the Autorité des marchés financiers (AMF) charged six defendants with a variety of offences, including failing to issue a prospectus in connection with a distribution of securities and providing false or misleading information to investors. The offences were punishable by a maximum fine of $5,000,000 and a maximum term of imprisonment of 5 years less one day.

The Jordan decision, which imposes an 18-month ceiling on trial delays attributable to the Crown in provincial courts (30 months in Superior Courts), permits extensions only in cases of sufficient complexity or in other exceptional circumstances. In the Desmarais decision, the Superior Court of Quebec, sitting in appeal of the provincial court’s decision, found that there was no palpable and overriding error in the provincial court’s finding that the proceeding did not rise to the level of a “particularly complex case” as required in Jordan, even despite the submissions of the AMF that the trial would feature 131 charges against 6 defendants, 35-40 witnesses, and a forensic accounting expert. In coming to the decision the provincial court judge had concluded the case did not have many different elements that would be difficult to disentangle, the issues in the case would become focused once evidence was gathered, and the defences of the multiple defendants were very similar. The judge wrote as well that neither the length of the trial nor the number of motions and witnesses necessarily rendered the questions in the litigation more complex for the purposes of the Jordan analysis.

The Supreme Court of Canada’s 2016 decision in R. v. Jordan significantly altered the framework for determining unconstitutional delay under s. 11(b) of the Charter of Rights and Freedoms, in the prosecution of criminal offences. The previous framework, set out in R v. Morin, required a contextual balancing of four factors: (1) the length of the delay; (2) waiver of time periods by the defendant; (3) the reasons for the delay, including the inherent needs of the case, defence delay, Crown delay, institutional delay, and other reasons for delay; and (4) prejudice to the accused’s interests in liberty, security of the person, and the right to a fair trial. Jordan, however, moved away from this contextual balancing approach which focused on “prejudice”, and set instead a clear ceiling for trial delays attributable to the Crown, set at 18 months in the provincial courts and 30 months in the superior courts, except in exceptional circumstances. (Crown delay is calculated as the time between the charge and the actual or anticipated end of trial, subtracting for any delays waived or caused solely by the defendant). If more than 18 months (30 months in Superior Court) are required, the Crown bears the onus of demonstrating the presence of exceptional circumstances, which may arise either from “discrete events” (medical emergencies of participants in the trial, for example), or “particularly complex cases”.

The early jurisprudence under Jordan suggests the new framework may apply not only to criminal offences but also regulatory offences punishable by imprisonment, and to corporations as well as individuals. In R v. Live Nation Canada Inc., for example, Nakatsuru J. applied the framework to offences under Ontario’s Occupational Health and Safety Act, in ruling explicitly that the Jordan framework may apply to regulatory offences under provincial statutes as well as criminal offences, and also to corporate as well as the individual defendants. In Jeux sur mesures Maxima inc. c. Québec (Autorité des marchés financiers), the Court applied the new framework in the context of a prosecution alleging breach of securities law, granting an extension in that case pursuant to a separate transitional scheme set out in Jordan to deal with cases where the charges pre-dated the Supreme Court’s decision.

The author would like to thank Fahad Diwan, Student-At-Law, for his contribution to this article.

We shall defend our island, whatever the cost may be, we shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender.

The quote sets upon the razor sharp line between zealous advocacy and over pleading – dubbed “Churchillian resistance”[1] – in certification motions.

In Berg, the Plaintiffs’ main claim was that Canadian and American hockey clubs in both the Ontario Hockey League and the Canadian Hockey League do not pay their players minimum wage and overtime pay under employment standards statutes. In addition, they advanced claims of (1) breach of statute, (2) breach of contract, (3) breach of duty of honesty, (4) good faith and fair dealing, negligence, (5) conspiracy and (6) unjust enrichment and waiver of tort.

The parties produced phenomenal amounts of evidence resulting in three days of oral arguments. The Plaintiffs were ultimately successful in certifying their action for breach of employment law statutes and unjust enrichment against the Canadian teams, but not the American teams.

No Novelty and Public Interest

In awarding costs, Perell J. promptly rejected the arguments for novelty and public interest litigation to reduce costs, stating that it was “disingenuous for both parties to suggest that this litigation is other than self-interested commercial litigation about enforcing an employment contract.”[2]

This resistance in recognizing public interest to reduce or eliminate cost awards is echoed in Perell J.’s recent decision in Das v. George Weston Limited, 2017 ONSC 5583. In it, he dismissed a proposed class action relating to the collapse of the Rana Plaza building in Bangladesh where 1,130 people died and 2,520 people were seriously injured. Joe Fresh Apparel Canada Inc., a subsidiary of Loblaws, purchased clothes from a manufacturer who owned a factory in the Rana Plaza. The Plaintiff received financial support from the Law Foundation of Ontario’s Class Proceedings Fund. The Fund argued that there should be no cost orders because the action was brought in the public interest and because the action raised many novel issues and its outcome was impossible to predict. Perell J., having regard for the way the case was aggressively pleaded and prosecuted, found that the Plaintiffs’ claims were not novel in the requisite legal sense.[3]

An Expensive Cost Award

In Berg, Plaintiffs sought a partial indemnity cost of $1,212,065.63 for a certification motion; the Defendants, the Ontario Hockey League and the Canadian Hockey League, submitted that there should be no cost award. Defendant American Teams of the Ontario Hockey League against whom the action was not certified sought costs of $224,362.91.

Perell J. awarded the Plaintiffs $1,212,065.63, all inclusive, $500,000 payable forthwith with the balance of $712,065.63 payable to the Plaintiffs if they succeed at the issues at trial. He also awarded the American Teams $200,000, which was credited against the award made against the commonly represented Defendants.

Takeaway

In Berg, Perell J. ultimately concluded that both parties were equally responsible for transforming the certification motion from a procedural motion into a substantive motion where both parties attempted to justify both their legal and their moral positions. Quoting himself in the reasons for the decision, Perell J. wrote that “both sides baited the other and both sides took the bait – hook, line, sinker, and litigation fishing boat.”[4]

This case serves as a stark reminder that a certification motion under the Class Proceedings Act, 1992 is procedural law, not substantive law and that Defendants should adopt a tempered approach in mounting a defence at the certification stage.

The author wishes to thank Saam Pousht-Mashhad, Student-At-Law, for his contribution to this article.